Bad publicity is a great motivator, especially if it involves rubber gloves.
Back in 2021, Top Glove, which makes more disposable gloves for doctors, nurses and surgeons than anyone else in the world, found itself in trouble with the NHS and the US government. The authorities in its home country Malaysia uncovered evidence of forced labour and insufficient Covid protections in their factories.
Its customers were not happy. In fact, the US banned its products from being used in the country, which mean that 22% of its revenue disappeared. Investors were equally unimpressed and a planned $1bn (£771bn) stock market listing in Hong Kong was scrapped.
The US ban was lifted after it convinced the authorities that working conditions had improved. Compensation totalling $30m (£23m) made to those effected also helped reverse the decision.
Loss of revenue can result from being accused of exploitation and can be rectified by improving conditions for your employees, but repairing a damaged reputation could take longer. A clear example of why human rights is a major risk for investors.
Indeed, the health and safety of workers, eradicating forced and child labour and displacing communities are areas where institutional investors should be using their influence over the corporates sitting in their portfolios to improve the standard of human rights in the supply chain.
This is a huge issue. Around 27.6 million people are believed to be victims of forced labour globally, according to Anti-Slavery International, a charity. It also claims that a fifth of global cotton production is linked to slavery in China.
Making a stand
A range of industries, from fashion to mining and manufacturing have found themselves at the centre of human rights scandals. Many are repeat o enders. The pressure on institutional investors to hold companies to account if they are infringing these rights is growing. And many are taking action.
Blackrock was an investor in Top Glove when it hit the headlines over the forced labour in its factories. The asset manager decided to voted against the re-election of directors sitting on the company’s board. Blackrock was using its influence on behalf of the pension schemes it manages capital for to drive change at the company. But this isn’t just about ethics.
In an Edelman Trust Barometer survey of 700 global investors, 90% agreed that companies prioritising ESG integration represent better opportunities for long-term returns than those who do not. And the market share of those thinking this way is expected to move in the right direction.
Indeed, global ESG assets surpassed $30trn (£23trn) in 2022 and are expected to be worth at least another $10trn ($7.7trn) by 2030, which would be a quarter of all assets under management, according to Bloomberg Intelligence.
The eye of the storm
Being at the centre of an exploitation scandal is a concern for business leaders on both sides of the Atlantic, if surveys are to be believed.
Indeed, research carried out last year by Proxima, a consultancy, found that most chief executives in the UK and the US are aware of the risks that could be lurking in their supply networks.
The survey of 2,000 companies with at least 50 employees found that 69% of their leaders are concerned about benefiting from human rights abuses in the companies they contract services from.
Proxima’s executive vice president, Simon Geale, said at the time that addressing human rights issues across the supply chain is a “huge challenge” for businesses and is high on the agenda for their leaders.
“We’ve seen a number of businesses fall victim to human rights issues,” he added, “and as we see increased scrutiny from customers and regulators, supply chain transparency is going to become increasingly critical. This is the emerging priority for CEOs at a time when business leaders are spending more time than ever tackling supply chain issues.”
Unsurprisingly, the figure for leading retail businesses is higher, at 79%. This reflects the greater scrutiny the fashion industry is under following a series of scandals involving those making clothes to be sold on high streets across the developed world.
There was Rana Plaza, the eight-storey building in Bangladesh that collapsed back in 2013 taking the lives of more than 1,100 people with it. Substandard materials were used in the construction of the building, which was not designed to be a factory and more floors were then added than were deemed safe. It made clothes for companies including Primark.
It was not the only example of a disaster in Bangladesh’s manufacturing sector, as a re hit another factory in the country a year earlier. Faulty wiring was named as the likely culprit.
Safety standards have improved since the disaster. They have had to if Bangladesh is to maintain its position as the world’s second largest clothing maker behind China. In 2022, the industry employed 4 million people and was worth $42.6bn (£32.8bn) to the economy.
Boohoo
It is not only in the developing world where institutional investors need to be vigilant against workforce exploitation. They have been closer to home with one particular scandal involving online clothing retailer Boohoo.
As businesses struggle to meet demand for what is known as ‘fast fashion’ – mass produced low-cost garments sold online and on Britain’s high streets – at least one supplier had cut corners.
In 2020, undercover reporters found that a factory in Leicester making clothes for the company was paying workers as little as £3.50 an hour, less than half of the £8.72 minimum wage at the time. They were also operating as usual during the Covid lockdowns, putting its staff at risk.
The home secretary at the time, Priti Patel, launched a modern slavery and human tracking investigation. A barrister-led review backed up the journalists’ claims of low pay and poor working conditions and labelled Boohoo’s monitoring of their supply chain as “inadequate”.
Those holding Boohoo’s stock also suffered. Shares in the company plunged by 44%, wiping o more than £2bn of value. There have since been allegations that the changes made since the story broke have not been adequate.
Full disclosure?
Most large companies have divisions that tackle risks such as anti-corruption or cybercrime, so why not human rights?
In North America, only 85% of companies with human rights commitments publish such disclosures related to their supply chains. This has risen from 56% in 2017, so it is moving in the right direction, but why isn’t the figure 100% if they have a policy in this area.
One reason could be due to the visibility of the supply network, which, if it involves companies in the emerging world, might be difficult to monitor.
“A key concern is poor transparency of organisational supply chains, which is hampering progress on these topics – and many CEOs bemoan their inability to make informed decisions and manage risks based upon supply chain data available today,” Geale says.
Upholding human rights often relies on voluntary agreements and some regulation, which seeks to improve corporate practices. Legal frameworks that require companies to report on human rights and environmental issues include the European Union’s Corporate Sustainability Reporting Directive (CSRD).
Then there is the UN Guiding Principles on Business and Human Rights. Principle number 17, for example, calls on companies to undertake human rights due diligence to identify, prevent, address and mitigate adverse human rights risks and impacts.
However, a survey of 1,300 corporate executives in 13 countries found that more than 70% lacked confidence in their own ESG reporting, according to business data specialist Workiva. That was two years ago, so it is hoped that confidence is growing.
No guarantees
Investing in specifically labelled sustainable investment products may not save investors from reputational damage when it comes to human rights abuses. The Business & Human Rights Resource Centre had a shock when they looked into the shareholders of the companies that funded and equipped Myanmar’s military, which the UN has accused of crimes against humanity.
They found that more than $13bn (£10bn) of capital owed from 344 ESG funds into 33 of those companies, which included weapons manufacturers, energy giants, tech companies and even Facebook, which was accused of facilitating hate speech on its platform against the Rohingyas, a minority being persecuted in the country.
But ESG is not about investing in companies with high ethical profiles. It is about changing badly behaved companies, improving their practices and how they make money. If necessary, the goal is to make them greener and fairer.
Spotting such abuses is on the agenda for Abrdn. The asset manager believes a focus on human rights provides a valuable insight into a company’s risks and opportunities. There are two approaches it uses to assess and integrate human rights risks into portfolios.
The first is a top-down assessment of the human rights environment in a given country or region, particularly drawing on political and social research, to understand the potential impact on potential investments. Proprietary ESG frameworks and indices are used to identify key rights at risk.
Then there are bottom-up assessments of how companies face human rights issues depending on their activities. For instance, land rights and community consent are more relevant for a mining firm, while the right to privacy would be more of a priority for a software provider.
It’s not just about the S
But human rights are not just about how much an employee is paid or the number of breaks they are allowed. It is an issue that stretches far beyond the social pillar of ESG. Indeed, cutting the amount of carbon in the atmosphere could help in the fight to ensure a higher quality of life, as the two are interlinked.
Human rights include a right to live in a clean and healthy environment free from pollution and hazardous weather pat- terns. It is also a factor in not just building a greener economy but to facilitate a just transition, too, where communities are not decimated as livelihoods disappear.
But it goes further than that. In 2019, a Dutch court ordered the government to cut carbon emissions, describing climate change as a threat to human rights. A few years later, Brazil’s supreme court declared the Paris Agreement a human rights treaty. Then in 2021, the UN passed a non-legally binding resolution declaring that a healthy environment is a human right.
So climate change, nature loss, pollution and waste are human rights abuses as they are major threats to humanity. The heatwaves, droughts, floods and wild fires climate change create are a threat to our food and freshwater supply, our health, our sources of energy and drives migration.
At the time the UN’s resolution was passed, Inger Andersen, executive director of the UN Environment Programme, said: “This resolution sends a message that nobody can take nature, clean air and water, or a stable climate away from us – at least, not without a fight.”
New direction
It is clear that in today’s market, companies cannot afford to ignore human rights abuses in their supply chains or, indeed, within their own operations. Employing risk assessments or using a compliance programme could be crucial to helping companies maintain strong relationships with their clients and suppliers, make their operations more efficient and to guard their reputation.
Aside from helping to make the world a better place, it could also avoid causing social unrest in economies where an enterprise is exploiting its local workforce.
If you need convincing, just ask the investors who were exposed to Boohoo when it made the front pages over how its workforce was treated. It could make for an interesting conversation.
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